The Cook & Bynum Fundhttp://www.cookandbynum.com
Tue, 31 Mar 2015 14:21:59 +0000en-UShourly1http://wordpress.org/?v=4.1.1Richard Cook in in NY Times – Kraft Foods and Heinz to Mergehttp://www.cookandbynum.com/richard-cook-in-in-ny-times-kraft-foods-and-heinz-to-merge/
http://www.cookandbynum.com/richard-cook-in-in-ny-times-kraft-foods-and-heinz-to-merge/#commentsWed, 25 Mar 2015 14:19:50 +0000http://www.cookandbynum.com/?p=12113http://www.cookandbynum.com/richard-cook-in-in-ny-times-kraft-foods-and-heinz-to-merge/feed/0A Downside of Moore’s Lawhttp://www.cookandbynum.com/a-downside-of-moores-law/
http://www.cookandbynum.com/a-downside-of-moores-law/#commentsThu, 19 Mar 2015 14:32:03 +0000http://www.cookandbynum.com/?p=12085Continue reading ]]>When most people think about computer-related security issues, software vulnerabilities are probably what first come to mind. A new physical breach that takes advantage of the electromagnetic leakage from transistors has been tested by and reported on by a group of Google researchers.

As Moore’s Law has packed more and more transistors onto a single memory chip, scientists have fretted for years that electric charges that “leak” out from those tiny components might cause unpredictable errors in neighboring semiconductors. But now a team of Google researchers has demonstrated a more unexpected problem with that electromagnetic leakage: hackers can use it to purposefully corrupt portions of some laptops’ memory, and even to bypass the security protections of those computers.

In a post on its Google Project Zero security blog Monday, a group of the company’s researchers revealed new hacker exploits that take advantage of what’s known as the “Rowhammer” technique. Here’s how Rowhammer gets its name: In the Dynamic Random Access Memory (DRAM) used in some laptops, a hacker can run a program designed to repeatedly access a certain row of transistors in the computer’s memory, “hammering” it until the charge from that row leaks into the next row of memory. That electromagnetic leakage can cause what’s known as “bit flipping,” in which transistors in the neighboring row of memory have their state reversed, turning ones into zeros or vice versa. And for the first time, the Google researchers have shown that they can use that bit flipping to actually gain unintended levels of control over a victim computer. Their Rowhammer hack can allow a “privilege escalation,” expanding the attacker’s influence beyond a certain fenced-in portion of memory to more sensitive areas. “We have shown two ways in which the DRAM rowhammer problem can be exploited to escalate privileges,” the researchers write in their blog post. “History has shown that issues that are thought to be ‘only’ reliability issues often have significant security implications, and the rowhammer problem is a good example of this. Many layers of software security rest on the assumption the contents of memory locations don’t change unless the locations are written to.”

* * * * *

“This is definitely some of the more important security research to come out in years,” says well-known security researcher Dan Kaminsky, who gained fame for finding a critical security flaw in the Internet’s domain name system in 2008. “We think of a computer as deterministic…The moment it isn’t, you have undefined behavior, and in security undefined behavior is redefinable behavior. The [software] developer doesn’t know what the computer’s going to do, but the attacker does.”

…Even so, the Googlers’ work represents an important step in proving that many computers’ DRAM has an inherent physical flaw, and one that can’t be fixed with a mere software patch. The researchers released a Rowhammer test program, which allows users to check if their memory is vulnerable to bit flipping. And they suggest that memory makers consider implementing new Rowhammering protections that “refresh” memory after a certain number of accesses to adjacent positions to prevent electromagnetic leakage from causing bit flips. Still, ex-Googler Marquis-Boire points out that what makes the Rowhammer vulnerability so insidious is that isn’t fundamentally a software issue. And that will make fixing it a much more complex process than the typical software update. “That’s what’s so interesting about Rowhammer: It’s a physical world problem,” he says. “And physical world attacks are always the hardest to patch.”

]]>http://www.cookandbynum.com/a-downside-of-moores-law/feed/0Et tu, China?http://www.cookandbynum.com/et-tu-china/
http://www.cookandbynum.com/et-tu-china/#commentsWed, 18 Mar 2015 14:16:07 +0000http://www.cookandbynum.com/?p=12077Continue reading ]]>China’s National Bureau of Statistics reports that new home prices dropped 5.7% year-over-year, the biggest annual decline since the survey began in 2011. Month-over-month, new home prices fell in 66 of the country’s 70 major cities in February, up from 64 in January. Premier Li Keqiang has promised to support the national economy if it continues to slide (are there any other pages in a central bank’s playbook anymore?), but the balance sheets of municipal, regional, and the national governments are already over-leveraged from previous stimulus efforts.

China’s home prices dropped in more cities last month as an economic slowdown weighed on demand even after the government removed property curbs and reduced borrowing costs. New-home prices fell in 66 of the 70 cities tracked by the government from a month earlier, the National Bureau of Statistics said Wednesday, compared with 64 in January. Prices rose in two cities and were unchanged in another two.

Two interest-rate cuts in three months and the removal of property restraints have yet to revive an industry that remains a drag on economic expansion as Premier Li Keqiang set the lowest growth target in more than 15 years. Demand was also dented by the week long Lunar New Year holiday, traditionally a slow period for home sales as many Chinese people travel back to their hometowns for family reunions.

“We are far from bottoming out, far from real price recovery,” said Robert Fong, a Hong Kong-based property analyst at Bloomberg Intelligence, citing an “alarming” decline in sales in the first two months of this year. “Most of the first half of 2015 will likely still be spent digesting inventory.” New-home sales dropped 17 percent in the first two months of this year from a year earlier, as industrial output growth recorded the slowest start to a year since 2009, according to official data released last week that didn’t provide separate figures for January and February.

]]>http://www.cookandbynum.com/et-tu-china/feed/0Money Mismatchhttp://www.cookandbynum.com/moneymismatch/
http://www.cookandbynum.com/moneymismatch/#commentsSun, 15 Mar 2015 19:47:15 +0000http://www.cookandbynum.com/?p=12092Continue reading ]]>While rates for borrowing in US dollars have been attractive in recent years for foreign governments and businesses, raising capital in a mis-matched currency has real underlying risks. The dollar’s recent strengthening could have dire consequences for these entities, especially those susceptible to the double-whammy of falling commodity prices.

The dollar’s global role gives the Federal Reserve huge influence abroad. Yesterday the Fed indicated that it may at last raise interest rates soon—although more slowly than many had expected. The dollar slipped; but respite for emerging economies from the strong greenback may be brief. Between 2009 and 2014 dollar borrowing by foreigners boomed; the amount in emerging markets rose from $2 trillion to $4.5 trillion. There are big pools of dollar debt in countries such as South Africa and Turkey that have large current-account deficits. Big state companies are vulnerable: energy giants like Russia’s Gazprom and Brazil’s Petrobras have issued dollar bonds but now face shrunken dollar incomes, thanks to falling prices. Even China, a big net lender of dollars, may face some pain. Chinese firms have built up a nasty currency mismatch: almost 25% of their debt is in dollars, against only 8.5% of their earnings.

http://www.cookandbynum.com/moneymismatch/feed/0The Disney Magic(Band)http://www.cookandbynum.com/the-disney-magicband/
http://www.cookandbynum.com/the-disney-magicband/#commentsSat, 14 Mar 2015 14:21:19 +0000http://www.cookandbynum.com/?p=12080Continue reading ]]>If you have been to Disney World recently, you probably have had some first-hand experience with the new MagicBand. A $1B+ investment, the bands are reducing “friction” that have always been part of the park experience. The current nuts-and-bolts of the tool/service, which are already remarkable, appear to only be a sneak peak of how else the technology may transform the customer experience across all of Disney’s properties.

Their MagicBands, tech-studded wristbands available to every visitor to the Magic Kingdom, feature a long-range radio that can transmit more than 40 feet in every direction. The hostess, on her modified iPhone, received a signal when the family was just a few paces away. The kitchen also queued up: Two French onion soups, two roast beef sandwiches! When they sat down, a radio receiver in the table picked up the signals from their MagicBands and triangulated their location using another receiver in the ceiling. The server—as in waitperson, not computer array—knew what they ordered before they even approached the restaurant and knew where they were sitting.

* * * * *

The MagicBands look like simple, stylish rubber wristbands offered in cheery shades of grey, blue, green, pink, yellow, orange and red. Inside each is an RFID chip and a radio like those in a 2.4-GHz cordless phone. The wristband has enough battery to last two years. It may look unpretentious, but the band connects you to a vast and powerful system of sensors within the park. And yet, when you visit Disney World, the most remarkable thing about the MagicBands is that they don’t feel remarkable at all. They’re as ubiquitous as sunburns and giant frozen lemonades. Despite their futuristic intentions, they’re already invisible.

Part of the trick lies in the clever way Disney teaches you to use them—and, by extension, how to use the park. It begins when you book your ticket online and pick your favorite rides. Disney’s servers crunch your preferences, then neatly package them into an itinerary calculated to keep the route between stops from being a slog—or a frustrating zig-zag back and forth across the park. Then, in the weeks before your trip, the wristband arrives in the mail, etched with your name—I’m yours, try me on. For kids, the MagicBand is akin to a Christmas present tucked under the tree, perfumed with the spice of anticipation. For parents, it’s a modest kind of superpower that wields access to the park.

If you sign up in advance for the so-called “Magical Express,” the MagicBand replaces all of the details and hassles of paper once you touch-down in Orlando. Express users can board a park-bound shuttle, and check into the hotel. They don’t have to mind their luggage, because each piece gets tagged at your home airport, so that it can follow you to your hotel, then your room. Once you arrive at the park, there are no tickets to hand over. Just tap your MagicBand at the gate and swipe onto the rides you’ve already reserved. If you’ve opted in on the web, the MagicBand is the only thing you need. It’s amazing how much friction Disney has engineered away: There’s no need to rent a car or waste time at the baggage carousel. You don’t need to carry cash, because the MagicBand is linked to your credit card. You don’t need to wait in long lines. You don’t even have to go to the trouble of taking out your wallet when your kid grabs a stuffed Olaf, looks up at you, and promises to be good if you’ll just let them have this one thing, please.

This is just what the experience looks like to you, the visitor. For Disney, the MagicBands, the thousands of sensors they talk with, and the 100 systems linked together to create MyMagicPlus turn the park into a giant computer—streaming real-time data about where guests are, what they’re doing, and what they want. It’s designed to anticipate your desires. Which makes it exactly the type of thing Apple, Facebook, and Google are trying to build. Except Disney World isn’t just an app or a phone—it’s both, wrapped in an idealized vision of life that’s as safely self-contained as a snow globe. Disney is thus granted permission to explore services that might seem invasive anywhere else. But then, that’s the trick: Every new experience with technology tends to gently nudge our notions of what we’re comfortable with.

* * * * *

Disney shrouds its creative process in secrecy. This is both strategic and cultural: The company doesn’t want its magic tainted by the messy realities behind the curtain. That’s particularly true of the MagicBands. Piecing together their origin required more than two dozen interviews with executives at Disney and with designers and engineers who worked on the project but could speak only anonymously due to non-disclosure agreements.

Though the team behind this sprawling platform eventually swelled to more than 1,000 people, the idea started years ago with a handful of insiders. People jokingly called them the Fab Five—an almost sacrilegious reference to Mickey, Minnie, Donald, Goofy and Pluto. In 2008, Meg Crofton, then president of Walt Disney World Resort, told them to root out all the friction within the Disney World experience. “We were looking for pain points,” she says. “What are the barriers to getting into the experience faster?” The Fab Five were not just Imagineers, the demigods of fun who create Disney’s attractions. They also included high-level veterans of the company’s sprawling operations division, executives intimately familiar with the gnarly realities of running the park—from catching people trying to scam the ride-reservation system to making sure parents are reunited with lost kids.

But the Fab Five’s workaday roles belied a grand vision for Disney’s future. “They came back with a drawing of the Magic Kingdom without turnstiles,” Crofton says. But, she adds, there was a “domino effect in making one decision. Everything was wound together.” No one knew this better than John Padgett. He was the project’s most forceful advocate, and his name appears first on more than a dozen patents associated with MyMagicPlus. Within the company, this cascade of new technologies, and the dream of overhauling the park, thrilled some and threatened others, who fretted over the sheer complexity of it all.

The Fab Five drew particular inspiration from the then-nascent wearables market. The possibilities seemed nearly endless. They were especially intrigued by the Nike SportBand, a FuelBand predecessor that synced with a heart rate monitor and a pedometer in your shoe and fed data to a wrist-mounted display. Nike was using it in virtual events like the Human Race, a global, virtual 10K run that used wearers’ pedometer data. What if Disney did something like that, the Fab Five thought. What if a band could be the key that unlocked everything at Disney World?

* * * * *

“We’re just at the beginning of understanding what to do with this,” he says. What Staggs doesn’t share, but what former team members do, is that Disney already has conceived, designed, and engineered many more features that seem to border on science fiction—features even more ambitious than delivering your food to you without your having to ask.

The MagicBand contains sensors that let guests swipe onto rides and allow Disney to pinpoint their location. At Be Our Guest, they’re what enable the radios in the table and ceiling to triangulate your location so your server can find you. If Disney decides to install those sensors throughout the park, a new world of data opens up. They could have Mickey and Snow White find you. They might use the park’s myriad cameras to capture candid moments of your family—enjoying rides, meeting Snow White—and stitch them together into a personalized film. (The product teams called this the Story Engine.) But they might also know when you’ve waited too long in line and email you a coupon for free ice cream or a pass to another ride. And with that, they’ll have hooked the white whale of customer service: Turning a negative experience into a positive one. It recasts your memories of a place—that’s why casinos comp you drinks and shows when you lose at the tables…

]]>http://www.cookandbynum.com/the-disney-magicband/feed/0Berkshire Hathaway’s Annual Letterhttp://www.cookandbynum.com/berkshire-hathaways-annual-letter/
http://www.cookandbynum.com/berkshire-hathaways-annual-letter/#commentsFri, 06 Mar 2015 15:58:00 +0000http://www.cookandbynum.com/?p=12039Continue reading ]]>This year’s Berkshire Hathaway annual letter had a few bonus sections. In honor of the 50th anniversary of Buffett’s takeover of the business, Warren Buffett and Charlie Munger offered their extended thoughts on the key ingredients to Berkshire’s success. Richard was invited by The Wall Street Journal to share his thoughts on selected sections of the letter that were of particular interest.

From page 34 of the Berkshire Hathaway Annual Letter:

Excerpt: Next up is cash. At a healthy business, cash is sometimes thought of as something to be minimized – as an unproductive asset that acts as a drag on such markers as return on equity. Cash, though, is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent.

Cook & Bynum Annotation: Standard business school dogma seeks to maximize current returns on equity at the peak of an industry cycle. This obsession flows through beautifully in GAAP accounting when things are going well, but it inherently makes a business pro-cyclical. One of the hallmarks of Berkshire’s success has been an understanding of the opportunity cost of cash. Building cash in the good times has allowed Berkshire to be greedy when others are fearful. This counter-cyclical mentality has created billions more in value than has been foregone by ignoring the mantra of cash as an unproductive asset. In addition, this discipline reduces the risk of permanent capital loss. Being relatively unlevered when prices are expensive and prepared to purchase assets when they are cheap leads simultaneously to lower risk and higher returns.

Excerpt: Why did Berkshire under Buffett do so well? Only four large factors occur to me:

1) The constructive peculiarities of Buffett,

2) The constructive peculiarities of the Berkshire system,

3) Good luck, and

4) The weirdly intense, contagious devotion of some shareholders and other admirers, including some in the press.

Cook & Bynum Annotation: Mr. Buffett’s prodigious acumen for math, business, and investing are obvious. It is more unusual that a 26-year-old Buffett had the self-awareness to begin crafting a system that would maximize his peculiar gifts. Mr. Buffett would have been successful in many other systems, but he understood very young that he could magnify his accomplishment by getting as many at bats as possible in the areas of his relative competitive advantage. Good luck is always a factor in a story of achievement, but Mr. Buffett is unique in business history in that he combined those three with a cultivated skill to attract devotees. Always playing the long game, Mr. Buffett recognized young that developing the ability to attract the favor of others would be enormously beneficial in his career. This acumen helped him with Lorimer Davidson in 1951, with Jack Ringwalt in 1967, with Katherine Graham in 1973, in the Salomon bond scandal in 1991, and with Lloyd Blankfein in 2008. Mr. Buffett would have been successful without any one of these large factors, but Mr. Munger is right that the combination has created the lollapalooza result that is Berkshire Hathaway.

]]>http://www.cookandbynum.com/berkshire-hathaways-annual-letter/feed/0Is Brazil Its Own Worst Enemy?http://www.cookandbynum.com/is-brazil-its-own-worst-enemy/
http://www.cookandbynum.com/is-brazil-its-own-worst-enemy/#commentsThu, 05 Mar 2015 16:01:32 +0000http://www.cookandbynum.com/?p=12042Continue reading ]]>Plentiful natural resources and strong demographics are useful but not sufficient ingredients for a successful economy. Even before the idea of the BRICs was introduced, Brazil had been hailed as a cornerstone of future world GDP. Alas, the country’s natural advantages have been exploited and wasted through corruption, red tape, politically-motivated subsidies, etc. by self-interested leadership (these issues are plaguing all of the BRICs to varying degrees). The ballooning Petrobas scandal leads to the top of the government, and change will be difficult to accomplish.

Campaigning for a second term as Brazil’s president in an election last October, Dilma Rousseff painted a rosy picture of the world’s seventh-biggest economy. Full employment, rising wages and social benefits were threatened only by the nefarious neoliberal plans of her opponents, she claimed. Just two months into her new term, Brazilians are realising that they were sold a false prospectus. Brazil’s economy is in a mess, with far bigger problems than the government will admit or investors seem to register. The torpid stagnation into which it fell in 2013 is becoming a full-blown—and probably prolonged—recession, as high inflation squeezes wages and consumers’ debt payments rise. Investment, already down by 8% from a year ago, could fall much further. A vast corruption scandal at Petrobras, the state-controlled oil giant, has ensnared several of the country’s biggest construction firms and paralysed capital spending in swathes of the economy, at least until the prosecutors and auditors have done their work. The real has fallen by 30% against the dollar since May 2013: a necessary shift, but one that adds to the burden of the $40 billion in foreign debt owed by Brazilian companies that falls due this year.

Escaping this quagmire would be hard even with strong political leadership. Ms Rousseff, however, is weak. She won the election by the narrowest of margins. Already, her political base is crumbling. According to Datafolha, a pollster, her approval rating fell from 42% in December to 23% this month. She has been hurt both by the deteriorating economy and by the Petrobras scandal, which involves allegations of kickbacks of at least $1 billion, funnelled to politicians in her Workers’ Party (PT) and its coalition partners. For much of the relevant period Ms Rousseff chaired Petrobras’s board. If Brazil is to salvage some benefits from her second term, then she needs to take the country in an entirely new direction.

* * * * *

Brazil’s problems are largely self-inflicted. In her first term Ms Rousseff espoused a tropical state-capitalism that involved fiscal laxity, opaque public accounts, competitiveness-sapping industrial policy and presidential meddling in monetary policy. Last year her re-election campaign saw a doubling of the fiscal deficit, to 6.75% of GDP.

To her credit, Ms Rousseff has at least recognised that Brazil needs more business-friendly policies if it is to retain its investment-grade credit rating and return to growth. This realisation is personified by her new finance minister, Joaquim Levy, a Chicago-trained economist and banker and one of the country’s rare economic liberals. However, Brazil’s past failure to deal promptly with macroeconomic distortions has left Mr Levy to grapple with a recessionary trap. To stabilise gross public debt, he has promised a whopping fiscal squeeze of almost two percentage points of GDP this year. Part of this is coming from the removal of an electricity subsidy and the reimposition of fuel duty. Both measures have helped to push inflation to 7.4%. He also plans to curb subsidised lending by public banks to favoured sectors and firms.

]]>http://www.cookandbynum.com/is-brazil-its-own-worst-enemy/feed/0Kasparov on Putin’s ‘Reign’http://www.cookandbynum.com/kasparov-on-putins-reign/
http://www.cookandbynum.com/kasparov-on-putins-reign/#commentsWed, 04 Mar 2015 16:09:16 +0000http://www.cookandbynum.com/?p=12045Continue reading ]]>Chess Grandmaster Garry Kasparov is now Chairman of the Human Rights Foundation. He has been a long-time, outspoken critic of Putin’s regime in Russia. In this recent editorial in The Wall Street Journal, he remembers his friend Boris Nemtsov and discusses what Nemtsov’s murder means for Russia’s way forward.

Vladimir Putin actually started, and ended, the inquiry while Boris’s body was still warm by calling the murder a “provocation,” the term of art for suggesting that the Russian president’s enemies are murdering one another to bring shame upon the shameless. He then brazenly sent his condolences to Boris’s mother, who had often warned her fearless son that his actions could get him killed in Putin’s Russia. Hours after Boris’s death, news reports said that police were raiding his home and confiscating papers and computers. President Putin’s enemies are often victims and his victims are always suspects. Boris was a passionate critic of Mr. Putin’s war in Ukraine and was finishing a report on the presence of Russian soldiers in the ravaged Donbas region, a matter that the Kremlin has spared no effort to cover up…

The early themes in Mr. Putin’s reign – restoring the national pride and structure that were lost with the fall of the Soviet Union – have been replaced with a toxic mix of nationalism, belligerence and hatred. By 2014 the increasingly depleted opposition movement, long treated with contempt and ridicule, had been rebranded in the Kremlin-dominated media as dangerous fifth columnists, or “national traitors,” in the vile language lifted directly from Nazi propaganda. Mr. Putin openly shifted his support to the most repressive, reactionary and bloodthirsty elements in the regime. Among them are chief prosecutor Alexander Bastrykin, who last week declared that the Russian constitution was “standing in the way of protecting the state’s interests.” In this environment, blood becomes the coin of the realm, the way to show loyalty to the regime. This is what President Putin has wrought to keep his grip on power, a culture of death and fear that spans all 11 Russian time zones and is now being exported to eastern Ukraine.

Boris Nemtsov was a tireless fighter and one of the most skilled critics of the Putin government, a role that was by no means his only possible destiny. A successful mayor in Nizhny-Novgorod and a capable cabinet member and parliamentarian, he could have led a comfortable life in government as a token liberal voice of reform. But Boris was unqualified to work for the Putin regime. He had principles, you see, and could not bear to watch our country slide back into the totalitarian depths. And so Boris launched his big body, big voice and big heart into the uphill battle to keep democracy alive in Russia. We worked together after he was kicked out of Parliament in 2004, and by 2007 we were close allies in the opposition movement. He was devoted to documenting the crimes and corruption of Mr. Putin and his cronies, hoping that they would one day face a justice that seemed further away all the time.

A studious, patient investor from a family whose durability drew the attention of scientists, Kahn was co-founder and chairman of Kahn Brothers Group Inc., a broker-dealer and investment adviser with about $1 billion under management. At age 108 he was still working three days a week, commuting one mile from his Upper East Side apartment to the firm’s midtown office. There, he shared his thoughts on investment positions with his son, Thomas Kahn, the firm’s president, and grandson, Andrew Kahn, a research analyst. “I prefer to be slow and steady,” he said in a 2014 interview with the U.K. Telegraph. “I study companies and think about what they might return over, say, four or five years. If a stock goes down, I have time to weather the storm, maybe buy more at the lower price. If my arguments for the investment haven’t changed, then I should like the stock even more when it goes down.”

* * * * *

Among the memories he filed away was his work with Benjamin Graham, the stock picker and Columbia Business School professor whose belief in value investing influenced a generation of traders including Warren Buffett. Graham, who died in 1976, distinguished between investors, to whom he addressed his advice, with mere “speculators.”

Kahn assisted Graham and his co-author, David Dodd, in the research for “Security Analysis,” their seminal work on finding undervalued stocks and bonds, which was first published in 1934. In the book’s second edition, published in 1940, the authors credited Kahn for guiding a study on the significance of a stock’s relative price and earnings.

In 2012, at 106, Kahn told Bloomberg Businessweek that Graham’s principles, though relevant as ever, were increasingly being drowned out by noise. “I’ve seen a lot of recoveries,” he said. “I saw crash, recovery, World War II, a lot of economic decline and recovery. What’s different about this time is the huge amount of quote-unquote information. So many people watch financial TV at bars, in the barber shop. This superfluity of information, all this static in the air.”

]]>http://www.cookandbynum.com/irving-kahn-passes-away-at-109/feed/0Klarman on Buffetthttp://www.cookandbynum.com/klarman-on-buffett/
http://www.cookandbynum.com/klarman-on-buffett/#commentsFri, 20 Feb 2015 15:49:05 +0000http://www.cookandbynum.com/?p=11983Continue reading ]]>Seth Klarman, who is always worth reading, recently reminisced about what he has learned from Warren Buffett, and the result was a useful series of reminders about the right way to think about investing.

1) Value investing works. Buy bargains.

2) Quality matters, in businesses and in people. Better-quality businesses are more likely to grow and compound cash flow; low-quality businesses often erode and even superior managers, who are difficult to identify, attract, and retain, may not be enough to save them. Always partner with highly capable managers whose interests are aligned with yours.

3) There is no need to overly diversify. Invest like you have a single, lifetime “punch card” with only 20 punches, so make each one count. Look broadly for opportunity, which can be found globally and in unexpected industries and structures.

4) Consistency and patience are crucial. Most investors are their own worst enemies. Endurance enables compounding.

5) Risk is not the same as volatility; risk results from overpaying or overestimating a company’s prospects. Prices fluctuate more than value; price volatility can drive opportunity. Sacrifice some upside as necessary to protect on the downside.

6) Unprecedented events occur with some regularity, so be prepared.

7) You can make some investment mistakes and still thrive.

8) Holding cash in the absence of opportunity makes sense.

9) Favour substance over form. It doesn’t matter if an investment is public or private, fractional or full ownership, or in debt, preferred shares, or common equity.

10) Candour is essential. It’s important to acknowledge mistakes, act decisively, and learn from them. Good writing clarifies your own thinking and that of your fellow shareholders.

]]>http://www.cookandbynum.com/klarman-on-buffett/feed/0Global Debt Has Ballooned Since ’07http://www.cookandbynum.com/global-debt-has-ballooned-since-07/
http://www.cookandbynum.com/global-debt-has-ballooned-since-07/#commentsFri, 20 Feb 2015 14:57:52 +0000http://www.cookandbynum.com/?p=11971Continue reading ]]>Despite some deleveraging by US households, a recent study by McKinsey reports that worldwide debt in nearly all of the 47 countries that it researched has grown in both absolute terms and relative to GDP.

Debt continues to grow. Since 2007, global debt has grown by $57 trillion, raising the ratio of debt to GDP by 17 percentage points. Developing economies account for roughly half of the growth, and in many cases this reflects healthy financial deepening. In advanced economies, government debt has soared and private-sector deleveraging has been limited.

Reducing government debt will require a wider range of solutions. Government debt has grown by $25 trillion since 2007, and will continue to rise in many countries, given current economic fundamentals. For the most highly indebted countries, implausibly large increases in real GDP growth or extremely deep reductions in fiscal deficits would be required to start deleveraging. A broader range of solutions for reducing government debt will need to be considered, including larger asset sales, one-time taxes, and more efficient debt restructuring programs.

Shadow banking has retreated, but non‑bank credit remains important. One piece of good news: the financial sector has deleveraged, and the most damaging elements of shadow banking in the crisis are declining. However, other forms of non‑bank credit, such as corporate bonds and lending by non‑bank intermediaries, remain important. For corporations, non‑bank sources account for nearly all new credit growth since 2008. These intermediaries can help fill the gap as bank lending remains constrained in the new regulatory environment.

Households borrow more. In the four “core” crisis countries that were hit hard—the United States, the United Kingdom, Spain, and Ireland—households have deleveraged. But in many other countries, household debt-to-income ratios have continued to grow, and in some cases far exceed the peak levels in the crisis countries. To safely manage high levels of household debt, more flexible mortgage contracts, clearer personal bankruptcy rules, and stricter lending standards are needed.

China’s debt is rising rapidly. Fueled by real estate and shadow banking, China’s total debt has quadrupled, rising from $7 trillion in 2007 to $28 trillion by mid-2014. At 282 percent of GDP, China’s debt as a share of GDP, while manageable, is larger than that of the United States or Germany. Several factors are worrisome: half of loans are linked directly or indirectly to China’s real estate market, unregulated shadow banking accounts for nearly half of new lending, and the debt of many local governments is likely unsustainable.

]]>http://www.cookandbynum.com/global-debt-has-ballooned-since-07/feed/0Maduro Opens the FX Door, But What Next?http://www.cookandbynum.com/maduro-opens-the-fx-door-but-what-next/
http://www.cookandbynum.com/maduro-opens-the-fx-door-but-what-next/#commentsThu, 19 Feb 2015 15:33:17 +0000http://www.cookandbynum.com/?p=11979Continue reading ]]>Nicolás Maduro is attempting to alleviate mounting political pressures in Venezuela by giving citizens access to dollars at a free-floating exchange rate, initially set around 172 bolivars to the dollar this week (the black market rate is about 190). Alas, access and amounts are limited, and Maduro’s government still maintains the other two official exchange rates of 6.3 and 12 bolivars per dollar, which now only look more absurd in the face of the new rate.

The government allowed citizens to buy and sell a limited number of U.S. dollars for the first time in over a decade at exchange houses and banks. The move is part of a slight loosening of the country’s strict currency controls that have caused a shortage of dollars, as well as a paucity of many basic goods. Residents on Thursday were limited to buying just $300 a day, or $2,000 a month, but for many the new currency market was the first legal way in a decade to get dollars outside the black market…The new system exchanged 172 bolívares to the dollar, a far weaker rate for the currency than the two official rates, at 6.3 and 12 per dollar, but stronger than the black market rate of about 190 bolívares to the dollar. The rate will float freely, government authorities have said.

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Venezuela’s government hopes the new market will drain life out of the black market and ease a budget deficit that economists estimate at between 17% and 20% of annual economic output. The gap has widened because the government sells the majority of dollars it earns through oil exports at the 6.3 and 12 rates as a way to subsidize imports of like milk and meat. “Venezuela has a very large budget deficit because it subsidizes imports through cheap dollars,” said Francisco Rodriguez, senior Andean economist at Bank of America Merrill Lynch…

Most observers doubt that the new system will offer enough hard currency to significantly narrow the budget gap or breathe new life into the country’s moribund economy, which contracted 2.8% last year and may contract up to 7% this year, according to the International Monetary Fund. President Nicolás Maduro has said that the new market will only feed between 5% and 7% of hard currency needs, while Venezuela’s dominant rate of 6.3 bolívares to the dollar remains in place for 70% of dollar requests, with the 12 bolivar-to-dollar tier absorbing much of the remaining transactions.

]]>http://www.cookandbynum.com/maduro-opens-the-fx-door-but-what-next/feed/0China’s Home Prices Continue Their Slidehttp://www.cookandbynum.com/chinas-home-prices-continue-their-slide/
http://www.cookandbynum.com/chinas-home-prices-continue-their-slide/#commentsWed, 18 Feb 2015 15:17:23 +0000http://www.cookandbynum.com/?p=11974Continue reading ]]>China’s home prices have extended their recent declines despite efforts by the PRC to expand credit by both loosening mortgage standards and lowering required bank reserves. Developers are under increasing pressure, and the balance sheets of regional/municipal governments are also overburdened.

The average price of new homes in 70 Chinese cities fell at a slightly faster monthly pace in January amid sluggish demand from home buyers, despite officials’ moves to loosen mortgage rules and ease lending. The decline in home prices also continued to widen in January on a yearly basis, according to data issued by the National Bureau of Statistics Tuesday. Home prices in first-tier cities fared better than those in smaller ones, as looser mortgage rules and more accommodative monetary measures lure home buyers back to the market. Late last year the central bank cut benchmark interest rates and early this month it lowered the amount of reserves banks have to set aside, a measure designed to encourage banks to increase lending.

But uncertainties still plague the Chinese property market. Many smaller Chinese cities are struggling with high inventories and property developers face tighter cash flow and narrowing margins. Prices in January slipped 0.43% on month, compared with a 0.40% fall in December, according to calculations by The Wall Street Journal. The fall in January follows four consecutive months of modest month-on-month improvements. The average price of new homes declined 5.1% in January on year, compared with a 4.3% fall in December. Excluding public housing, private-sector home prices fell in 69 of the 70 cities in January from a year earlier, compared to 68 cities that posted declines in December. Home prices fell in 64 of the 70 cities last month on a monthly basis, down from December’s 66.

]]>http://www.cookandbynum.com/chinas-home-prices-continue-their-slide/feed/0Richard Cook Quoted in Bloomberg – Even Berkshire’s Boardroom Ties Can’t Prevent the Costco-AmEx Divorcehttp://www.cookandbynum.com/richard-cook-quoted-in-bloomberg-even-berkshires-boardroom-ties-cant-prevent-the-costco-amex-divorce/
http://www.cookandbynum.com/richard-cook-quoted-in-bloomberg-even-berkshires-boardroom-ties-cant-prevent-the-costco-amex-divorce/#commentsThu, 12 Feb 2015 15:21:09 +0000http://www.cookandbynum.com/?p=11951http://www.cookandbynum.com/richard-cook-quoted-in-bloomberg-even-berkshires-boardroom-ties-cant-prevent-the-costco-amex-divorce/feed/0Government Run Groceryhttp://www.cookandbynum.com/government-run-grocery/
http://www.cookandbynum.com/government-run-grocery/#commentsFri, 06 Feb 2015 16:58:03 +0000http://www.cookandbynum.com/?p=11905Continue reading ]]>In our latest quarterly letter, we examined the first and higher-order effects that price controls are having in Venezuela. The Maduro-led government has taken their policies to the (il)logical next step with the nationalization of a grocery retailer.

The Venezuelan government has taken over supermarket chain Dia a Dia and ordered the detention of its owners, as socialist president Nicolás Maduro intensifies a crackdown on private businesses. It is the latest salvo in what Mr Maduro calls an “economic war” in which he has accused groups of trying to destabilise the country by creating a shortage of basic goods. On Tuesday armed national guardsmen were placed at some Dia a Dia (Day to Day) convenience stores in the capital, Caracas. Charges are also being pressed against pharmacy chain Farmatodo, for not opening enough check-outs, in what the government claims is a “guerrilla tactic” to spur discontent. “Those who use their stores to hurt the people will pay with prison time,” Mr Maduro said. Critics says the Maduro government is attempting to make the private sector the scapegoat for Venezuela’s deteriorating economy. Under policies introduced by the late president Hugo Chávez, much of the economy has been nationalised and manufacturing has declined, leaving the Opec nation heavily dependent on imported goods.

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Economists say price controls and strict currency exchange restrictions have generated a lack of dollars in the economy. This has in turn has caused widespread scarcity of basic goods, including toilet paper and powdered milk, and dragged Mr Maduro’s approval rating down to 22 per cent. Instead of relaxing controls to boost supply, the president blames the crisis on rightwing forces backed by the US. So far Mr Maduro has been reluctant to implement austerity measures to help his cash-strapped government boost its finances.

]]>http://www.cookandbynum.com/government-run-grocery/feed/0Stretching for No Yieldhttp://www.cookandbynum.com/stretching-for-no-yield/
http://www.cookandbynum.com/stretching-for-no-yield/#commentsWed, 04 Feb 2015 16:02:02 +0000http://www.cookandbynum.com/?p=11881Continue reading ]]>Bonds issued by Nestlé and Shell recently traded at negative yields, meaning investors are paying for the privilege of holding corporate debt. While this feels irrational at first blush, rates on sovereign Eurozone debt of similar duration are negative or effectively zero due to purchases by the ECB and by banks (sovereign debt is treated as risk-free on their balance sheets regardless of reality). In a negative real interest rate world, investors are scrambling for the least-bad alternative to preserve capital.

Demand for its bonds surged in the wake of the ECB announcement that it would begin quantitative easing through a €60bn a month asset purchase programme. That sent yields, which move inversely to prices, on a Nestlé four-year, euro-denominated bond, which matures in 2016, to minus 0.008 per cent. That means investors are in effect paying to hold the bond. Corporate bonds remain more attractive to some investors than highly-rated sovereigns, even though they are riskier, because they tend to pay more substantial interest. But it is extremely rare for corporate bond yields to turn negative. Shell, the oil company, last week briefly saw one of its bonds trade negative before returning back into positive territory according to UBS.

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QE is seen as a boon for bond issuers, particularly companies and governments, whose borrowing costs have plummeted to all-time lows. Record volumes of government debt have moved into negative yields since the ECB became the first central bank in the world to begin charging banks to hold their surplus cash last June. More than €1.5tn of euro area debt maturing in more than a year now pays a negative yield, according to JPMorgan, compared with nothing a year ago. German debt now has negative yields on bonds with maturities up to six years, as does Denmark. The Netherlands, Sweden and Austria all have negative yields on debt up to five years while Swiss bonds are now negative up to 13 years…

“The ECB is the overwhelming driving force in markets,” said Philip Brown, head of sovereign debt markets at Citi. “The impact is being felt not only in the eurozone government bonds that the ECB plans to buy but in the assets that investors will move into once they sell to the ECB.”

Salman Ahmed, strategist at Lombard Odier Investment Managers said the ECB’s larger than expected QE programme could create severe dislocations in fixed income markets. “Unlike the US and UK, the ECB’s programme will eat into the existing stock of debt securities held by banks and investors rather than just offsetting the new flow of securities,” he said. “It is highly conceivable in our view that highly rated European sovereign credit will remain in negative yielding territory for the foreseeable future.”

]]>http://www.cookandbynum.com/stretching-for-no-yield/feed/0Free Markets and Free Thinkinghttp://www.cookandbynum.com/free-markets-and-free-thinking/
http://www.cookandbynum.com/free-markets-and-free-thinking/#commentsTue, 03 Feb 2015 19:55:27 +0000http://www.cookandbynum.com/?p=11910Continue reading ]]>In his valedictory column upon the completion of his time as editor-in-chief of The Economist, John Micklethwait revisits the magazine’s raison d’etre and considers his hope for (19th century) liberal economics and the associated importance of free markets and free thinking.

If liberal politics are rightly attacked, the blows that have rained down on liberal economics have perhaps been even more painful. It is now a commonplace to blame the dominant event of this editorship, the 2007-08 financial crisis, on unfettered capitalism. This is mostly a calumny: the epicentre was the American mortgage market, one of the most regulated industries on Earth, and Leviathan’s hand was all over much of the mess that followed. But part of the charge against capitalism was true, and it hurts. No liberal can justify a system in which huge banks’ balance-sheets teetered on tiny amounts of capital. In 2006 too much of finance was gambling, pure and simple; and too much of the bill ended up with taxpayers. This helps explain why a feeling of unfairness lingers across the West—visible in the streets of Athens, but also in the pages of Thomas Piketty. People blame liberalism for much of what they fear: whether large-scale immigration, technological change, or just what the French call mondialisation.

Such a reaction is not unreasonable. Globalisation has indeed brought problems in its wake. But it has also done an incredible job in reducing want. Since 1990, nearly 1 billion people have been hauled out of extreme poverty; and the 75m people who bought an iPhone in the last quarter of 2014 were not all plutocrats. Moreover, open markets could do more, not least in the West. Free-trade pacts across the Atlantic and the Pacific would spur growth, while Mrs Merkel could open up Europe’s single market in services. The magic still works, and liberals should be far bolder in making that optimistic case.

But that is not enough. Two great debates are forming that will redefine liberalism. The first is to do with inequality. A more open society, where global markets increase the rewards for the talented, is fast becoming a less equal one…These were causes that motivated Wilson, John Stuart Mill, William Gladstone and the great liberals of the 19th century, who waged war on “the old corruption” of aristocratic patronage and protection for the rich, such as the corn laws this newspaper was set up to oppose. But they were progressives who also believed in a smaller state. This is the second debate forming around liberalism, and a dilemma: for although this newspaper wants government’s role to be limited, some of the remedies for inequality involve the state doing more, not less. Early education is one example. Only 28% of American four-year-olds attend state-funded pre-school; China is hoping to put 70% of its children through pre-school by 2020.

The answer is to scale down government, but to direct it more narrowly and intensely. In Europe, America and Japan the state still tries to do too much, and therefore does it badly. Leviathan has sprawled, invading our privacy, dictating the curve of a banana and producing tax codes of biblical length. With each tax break for the already rich and with each subsidy to this business or that pressure group, another lobby is formed, and democracy suffers…

The battle for the future of the state is an area where modern liberalism should plant its standard and fight, just as the founders of the creed did. Because, in the end, free markets and free minds will win. Liberalism has economic logic and technology on its side—as well as this wonderful newspaper, which I now hand over into excellent hands. And that is my last, best reason for optimism.

]]>http://www.cookandbynum.com/free-markets-and-free-thinking/feed/0Eroding Mortgage Standardshttp://www.cookandbynum.com/eroding-mortgage-standards/
http://www.cookandbynum.com/eroding-mortgage-standards/#commentsThu, 22 Jan 2015 17:33:59 +0000http://www.cookandbynum.com/?p=11849Continue reading ]]>Much like fixed income investors in corporate bonds have been willing to accept more risk through weaker covenants to chase what little yield remains, mortgage underwriters are willingly lowering down payment standards to attract more borrowers. Unlike corporate bond buyers, these originators are often backstopped by Fannie Mae and Freddie Mac, who have promoted these risk-generating requirements by lowering minimum down payments in recent weeks. Compounding the inherent principal-agent problem, the worse loan-to-value ratio both increases payments, which means borrowers have less room for error in terms of their monthly cash flow, and makes full loan recovery harder in the event of default for the lender and/or mortgage insurer. While this move may stimulate mortgage demand and increase fees for brokers and banks, it sure smells a lot like the mid-2000’s.

It is getting easier for some buyers to land a house with less money up front. More lenders are lowering down-payment requirements, allowing borrowers to commit 3% – or even less – of a home’s purchase price to get a mortgage. Most had been requiring down payments of 20% or more since the recession began, with a few exceptions. Some lenders also are waiving mortgage-related fees, and more are allowing down payments to be made by other parties, such as the borrower’s family. The deals are aimed at buyers with good credit scores and a steady income who have been unable to save enough for a sizable down payment. They are often targeted at buyers who live in expensive housing markets, where even a small down payment can equal tens of thousands of dollars.

The trend toward lower down payments has picked up since mortgage-finance giants Fannie Mae and Freddie Mac, which buy most mortgages from lenders, recently lowered the minimum down payments they will accept to 3% from 5%. The changes are driven by an Obama administration effort to make homeownership affordable to a wider group of buyers…

Borrowers should be aware that small down payments leave them more at risk of owing more on their mortgage than the property is worth should home values in their market decline, says Jack McCabe, an independent housing analyst in Deerfield Beach, Fla. In addition, borrowers likely will incur higher costs over the life of the loan, including higher interest rates and, often, mortgage insurance.

The moves come as mortgage originations declined substantially last year. Lenders gave out an estimated $1.12 trillion in mortgages in 2014, down 39% from a year earlier and the lowest amount since 1997, according to the Mortgage Bankers Association, a Washington-based trade group.